Bruce Dixon, Spotless Group boss, hits back at the doubters after strong result

Sally Rose

Spotless Group Holdings chief executive Bruce Dixon has hit back at scepticism about the company's quick turnaround under private equity owner Pacific Equity Partners, as the company capped its return to the ASX by beating the revenue and profit forecasts in its prospectus.

"What people don't realise is that as a former Spotless executive I could see clearly how costs had blown out way too much at the company and took the opportunity to PEP," Mr Dixon said.

When the catering, cleaning, facilities management and laundry group relisted on May 23, having been taken off market in a hostile takeover less than two years earlier, it was the biggest initial public offering to hit the Australian Securities Exchange since 2010.

The shares made their debut above the $1.60 offer price and have traded higher ever since. Following Monday's maiden full-year results announcement the shares traded 1.6 per cent higher to $1.91, giving the company a market capitalisation of more than $2.09 billion.

Spotless is one of a batch of big companies that the private equity industry took public in a rush of sharemarket floats over the past year.

Other recent IPOs facing scrutiny to prove private equity has left enough value on the table for the next round of investors this reporting season include television broadcaster Nine Entertainment Co, credit reporting agency Veda Group, and private hospital operator Healthscope.

Spotless reported pro forma net profit of $106.6 million for the 12 months to June 30, beating its prospectus forecast by 3.1 per cent. Revenue was 2.3 per cent higher at $2.62 million. Statutory profit was 16.2 per cent ahead at $106.6 million.

Many fund managers have shied from Spotless since it returned to the public market, citing concerns that cuts made during the two-year stint under private equity ownership could prove too deep and hurt future growth prospects.

Simon Marais, the managing director at Allan Gray, which was the largest shareholder in Spotless prior to the PEP takeover said at the time of May's float it was "hard to see much upside".

Analysts said they understand 1200 head office jobs were slashed to 400, leading to fears quality would be hurt.

Mr Dixon told The Australian Financial Review that the quality of the 18-month turnaround led by Pacific Equity Partners is still being underestimated by the market.

"It was quick but we spent two years in the planning phases before the takeover happened," he said.

Mr Dixon also defended the strategy of heavy staff cuts. "It basically involved taking out a couple of layers of management. There has been very little reduction of front-line service staff," he said.

"If service was being affected that would be showing up in the revenue line, which it isn't. Plus, the company has a client retention rate above 90 per cent and are now winning customers," Mr Dixon said.

Spotless announced a new $200 million defence contract earlier this month. Mr Dixon said the group had recently won a number of smaller contracts from government and the mining industry.

Spotless now needs to secure less than $100 million of new contracts to meet its prospectus forecast for statutory earnings of $134.5 million in the current financial year, ended June 2015, he said.

UBS analyst Rohan Sundram, who has a buy recommendation on Spotless, said the result was in line with his expectations. Mr Sundram has noted Spotless now needs to deliver on its prospectus forecast for statutory earnings of $134.5 million in the current financial year before the stock is likely to rerate significantly higher.

The company reaffirmed that on Monday, but refrained from lifting forward guidance. Mr Dixon said he was being cautious because of the variability in timing of when new contracts may commence.

When Spotless de-listed it was operating on margins around 5 per cent. Margins are now sitting around 9 per cent, in line with the company's major international peers.

"Margins are still improving slightly. There is probably scope to eke out another 1 per cent to 2 per cent over the next two to three years," Mr Dixon said.

He said that in addition to increased efficiency, a shift in the mix of services that was less skewed to the lowest-margin division in cleaning services would help drive margin improvement.

Spotless directors intend to start paying a dividend in the current financial year and are targeting a payout ratio of between 65 per cent and 75 per cent of adjusted net profit after tax.